The document discusses standard costing, which involves setting standards for costs and revenues for controlling costs through variance analysis. It describes establishing standards for different cost elements like direct materials, direct labor, and overheads. Variances between actual and standard costs are analyzed to identify causes. Variance analysis helps reduce costs, measure efficiency, and control prices. The document outlines the standard costing process and advantages like effective cost control and developing cost consciousness.
2. Topics to be discussed
1. Meaning of standard, standard cost and standard costing.
2. Steps involved in standard costing.
3. Types of standards.
5. Establishment of standards for different elements of cost.
6. Variances and analysis of variances.
7. Investigation of variances and treatment of variances.
8. Advantages and disadvantages of standard costing.
9. Conclusion.
10. Bibliography.
3. Standard – It is used to refer to the predetermined rate
e.g. Rs 10 per unit
Standard costs - are predetermined cost which may be
used as a yardstick to measure the efficiency with
which actual costs has been incurred under given
circumstance.
Standard Costing – This is a technique which uses
standards for cost and revenues for the purpose of
control through variance analysis.
4. Standard costing involves the
following steps:
Setting standard costs for different
elements of costs
Recording of actual costs
Comparing between standard costs
and actual costs to determine the
variances
Analyzing the variances to know the
causes
Reporting the analysis of variances to
management for taking appropriate
actions wherever necessary
5. In simple Words:-
• Standard Costs
• Actual Costs
• Estimated Costs
Standard
costing
involves in
determining
6. For example:-
The system of standard costing can be used effectively to those industries
which are producing standardized products and are repetitive in nature.
Examples are cement industry, steel industry, sugar industry etc.
7. From the above, we may note that standard costs are:
•Pre-determined cost: Standard cost is always determined in advance and
ahead of actual point of time of incurring of costs.
•Based on technical estimated: Standard cost is determined only on the basis
of a technical estimate and on a rational basis.
•For the purpose of Comparison: The very purpose of standard cost is to aid
the comparison with actual costs.
•Based for price fixing: The prices are fixed in advance and hence the only
variation basis is the standard cost.
8. The
difference
between
actual
costs and
standard
cost is
known as
Profit Variance
Historical
Cost
9. TYPES OF STANDARDS
• Current Standard
• Basic Standard
Current Standard: This standard is used over a short
period of time and is related to current conditions.
Basic Standard: This standard is used over a long period
of time, from which a current standard can be developed.
10. ESTABLISHMENT OF STANDARDS
Analysis, experiment and training are fundamental
prerequisites for establishing standards ,these were
basic tenets of standard setting from early days.
11. Standard should be set for each element
of cost as follows –
Direct material – Standard direct material cost for
each product should be established. This will involve
1. Determination of standard quantity of materials
2. Determination of standard price per unit of
materials
12. Direct labor cost–
Determination of standard DLC will involve
determination of :
1. Standard time
2. Standard rate
Direct Expenses –
Standards for these may be based on past performance
records subject to anticipatory changes therein.
13. Standards for Overheads-
The overheads are classified into fixed, variable and semi-variable
overheads. Standard overhead rate is determined for
these on the basis of past records and future trend of prices. It
will be calculated per unit or per hour.
Setting standard for overhead cost involves the following two
steps:
1. Determination of the standard overhead costs, and
2. Determination of the estimates of production
Standard hour–
It is hypothetical hour which measures the amount of work
that should be performed in 1 (one) hour.
14. Standard cost card –
It shows the quantity and price of each type of materials,
labor, time and rate, hours and rates of variables and
overheads. In short a standard cost card should be
maintained for each product showing total unit cost of
production, breaking into respective elements of cost.
15. Objectives of Standard Costing:
1. Cost Control
2. Management by Exception
3. Develops Cost Conscious Attitude
4. Fixation of Prices
5. Fixing Prices and Formulating Policies
6. Management Planning
16. Which in a simple word
means:-
The purpose of standard costing is to
1. Reduce Costs
2. Measure Efficiency
3. Control Prices
17. VARIANCES
The deviation of actual from standard is called variance.
The two types variance are:
1. Favorable – actual cost < standard cost
2. Unfavorable – standard cost < actual cost
18. Variance may be divided into two
groups:
1. Price variance e.g. material price
variance, sales price variance.
2. Volume variance e.g. material usage
variance, sales volume variance.
19. ANALYSIS OF VARIANCE
Variances are analyzed in respect of:
1. Direct material
2. Direct labor
3. Overheads:- a. Variable overheads
b. Fixed overheads
20. In a standard cost system, all manufacturing costs are applied, or charged
to the inventory using standard or predetermined prices, and quantities.
The differences between the applied costs and the actual costs are charged
to variance accounts as shown symbolically in the enlarged graphic given.
21. Variance Investigation
Three approaches to variance investigations
are:
1. Rules of Thumb method.
2. Cost benefit analysis.
3. Use of statistical quality control chart.
22. Rules of Thumb method-
Based on experience, intuition and judgment, managers may
develop some rules which guide them in investigation
decision. This method has its own limitations because of its
rule of thumb nature.
Cost- benefit analysis –
Since not all variances are investigated by management,
therefore decisions to investigate can also be taken by cost
benefit analysis.
Use of statistical quality control –
SQC can also be applied by the firm in deciding whether to
investigate a variance. The key to SQC is a control chart.
23. TREATMENT OF VARIANCES-Three
methods are involved:
1. Transfer to profit and loss account or to cost of sales - all cost
variances are to be transferred to profit and loss account or to cost
of sales. If this method is followed, the standard cost of sales will
be converted into actual cost of sales.
2. Proration to inventories and cost of sales- cost variances are
distributed to work- in- progress and finished goods inventories
and cost of sales either on the basis of units of value. As a result,
both the inventories and cost of goods sold will be shown at actual
cost.
3. Setting up as reserves – variances are set up as reserves until
they are set- off.
24. Advantages of Standard Costing
1. To measure efficiency
2. To fix prices and formulate policies
3. For Effective cost control
4. Management by exception
5. Valuation of stocks
6. Cost consciousness
7. Provides incentives
25. Limitations of Standard Costing
1. Difficulty in setting
standards
2. Not suitable to small
business
3. Not suitable to all
industries
4. Difficult to fix responsibility
5. Technological changes
26. Conclusion
Standard quantities of inputs can be established based on ideal
performance, or on expected performance, but are usually based on
efficient and attainable performance. Research in psychology has
determined that most people will exert the greatest effort when goals
are somewhat difficult to attain, but not extremely difficult. If goals
are easily attained, managers and employees might not work as hard
as they would if goals are challenging. But also, if goals appear out of
reach, managers and employees might resign themselves to falling
short of the goal, and might not work as hard as they otherwise would.
For this reason, standards are often established based on efficient
and attainable performance.
Hence, a standard is a type of budgeted number; one characterized by
a certain amount of rigor in its determination, and by its ability to
motivate managers and employees to work towards the company’s
objectives for production efficiency and cost control.
27. BIBLIOGRAPHY
1. Martin. James R, Management Accounting: Concepts, Techniques &
Controversial Issues, 2000
2. Banerjee. Bhabatosh, Cost Accounting- Theory And Practice, PHI Learning Pvt
Ltd, 2009
www.accountingcoach.com
www.accountingformanagement.com
www.wikipedia.com